Top tips for DC schemes after the pension changes

The UK pensions industry has experienced more regulatory change in the past six months than in the previous six years. The Budget and charge cap announcements have significantly changed the framework for defined contribution schemes in the UK.

17/10/2014

Hilary Vince

Defined Contribution Strategy Manager

The UK pensions industry has experienced more regulatory change in the past six months than in the previous six years. The Budget and charge cap announcements have significantly changed the framework for defined contribution schemes in the UK.In light of these changes, Schroders’ Defined Contribution team, has created the top five tips for UK DC trustees and sponsors to consider:

1. Increased flexibility – know your membersThe Chancellor’s changes have torn up the rule book when it comes to post-retirement income. Our recent survey revealed that 81%1 of DC trustees and consultants were in favour of the increased flexibility. But the increased choice means it becomes more important than ever to know your members. We think it’s most unlikely most members will still want to purchase an annuity at age 65. With the old certainties blown away, trustees can only make a decision on suitable default arrangements before retirement if they know where their members are going afterwards.

2. Education – too little, too lateThe Budget announcement promised that members would receive advice on their financial options just before they retire. We believe this is going to be too little, too late. Even face-to-face guidance will be ineffective if it comes at age 65.Members need to be aware of the options long before that if they are to plan effectively. Only by communicating with members in the crucial 50 to 55 years stage will trustees be able to determine sensible default options in the pre-retirement stage.

3. Default options – the time for review is nowDo the charges on your default approach come in below the Government’s new 0.75% cap? If not, this needs to be addressed with some urgency, as the new rules take effect next April. Is your default still assuming members will buy an annuity with an investment strategy which switches to bonds and cash in the last five to ten years before retirement? If so, it’s probably wrong for the majority of your members. Your default investment option will almost certainly need to set them up to take advantage of the expanded options in retirement which may now be more attractive – i.e. cash or drawdown?

4. Scheme Administration – does it allow for this additional flexibilityDoes your scheme have the administrative flexibility to allow members to take advantage of the cash and drawdown options at retirement? Or will administrative limitations restrict the flexibility you can offer to members? Who will administer drawdown arrangements? Will members have to transfer out of the scheme to be able to use drawdown?

5. Robust governance – new arrangements may mean your governance needs to be reviewedIs your scheme’s governance robust enough to be able to deal with the new flexibility? Do you have facilities in place to be able to effectively communicate the implications of the changes to members? And for them to communicate with you? Knowing your members is only the first stage. You then need to act on the information, which will help shape your choice of default in the pre-retirement stage. Having chosen, do you have the resources to provide the monitoring necessary to ensure your default choices continue to be right for your members?

The recent changes have radically reshaped the defined contribution pension landscape. There is a lot for pension trustees to reconsider and we believe most will now have to go back to the drawing board. We have defined what we believe are the five key areas which they should focus, and act, on.

1The Schroders snap shot UK DC survey was undertaken in May 2014 and included participation from approximately 100 participants.

Important information: The views and opinions contained herein are those of Hilary Vince, DC Strategy Manager at Schroders, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

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There is no single answer to the problem of how to make increasingly inadequate pension savings cover ever-lengthening lives at a time of low investment returns. Having looked at the way a number of countries tackle the issue, we think any solution needs to combine investment income with longevity insurance.

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